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Chinese A-share weighting in MSCI Indexes to rise further starting Sep 1

Chinese A-shares will officially start the second phase of its inclusion into the MSCI Emerging Index and other indexes.

Starting from 1 September, the inclusion factor of existing A shares will be increased from 2.5 per cent to 5 per cent. In addition, ten more A shares including China Shenhua Energy, China Unicom and China’s second-largest telecom equipment maker ZTE, will be added as part of the most recent quarterly index review, taking the total number of A shares in the MSCI China Index to 236.

The adjustment will be completed after Friday’s close.

This time round there’s likely to be more turnover than on the initial inclusion day three months ago, when about 35 billion yuan in Chinese equities traded via Hong Kong, said Stephane Loiseau, head of cash equities and global execution services in Asia-Pacific at Societe Generale SA.

The increase of the inclusion factor will bring another 60 billion yuan overseas fund inflows, according to the calculation by the Everbright Securities。

The increase will raise A-shares’ weighting in the MSCI China Index to 2.4 per cent from previous 1.3 per cent and raise the weighting in the MSCI Emerging Market Index to 0.8 per cent, and accordingly, bring in additional $7.5-10 billion overseas fund inflows, according to the China International Capital Corporation.

Data shows that overseas funds inflows to China have been accelerating. The northbound net fund inflows, or net fund inflows to A-shares via the stock connect scheme between Hong Kong and the mainland, had amounted to 96.93 billion yuan,  including 27.6 billion fund inflows in August.

“For foreign investors who looks long-term values, it’s good time to increase allocation to A-shares,” said Yu Xiaobo, head of Chinese investment at Value Partner’s Group. China’s benchmark Shanghai Composite Index has slumped more than 15 per cent this year.

Foreign investors prefers liquor makers, banks and construction companies and more focused on blue-chip stocks with big capitalisation, said Nader Naeimi, fund manager at AMP Capital.

He said infrastructure sector and commodities that benefit from production restriction from environmental protection are also good choices, as well as oversold stocks with sound fundamentals, such as real estate developers and pharmaceutical companies, he added.

“We put more value on companies’ cash flows and competitive barriers which implies higher dividend ratio and stronger ability to deal with China’s deleveraging campaign,” said Cao Liyan, research director at Value Partners’ Group Shanghai.

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